Goodwill, for financial accounting purposes, is an intangible asset on the balance sheet that represents the excess of the amount paid for an acquired entity over the net fair value of the assets acquired. The Financial Accounting Standards Board has recently issued a new mandate. This new guideline eliminates annual amortization of goodwill and requires annual valuation for potential goodwill impairment and consequent writedown. Determining the amount of impairment requires management estimation, thus, allowing managerial discretion in developing the impairment amounts. Managerial discretion may then be used to manage earnings. Earnings management occurs when managers exercise their professional judgment in financial reporting to manipulate earnings. Prior literature documents that managers have strong motivations to manage earnings. Managers sometimes respond to these motivations by managing earnings to exceed key earnings thresholds. The new goodwill guideline might be used as an earnings management tool. Thus, this dissertation examines whether earnings management results from the judgmental latitude allowed in estimating goodwill when earnings will otherwise just miss key earnings benchmarks. Specifically, this study tests goodwill impairment writedowns in a cross-sectional distributional analysis for the year 2002, the first year following the effective date of the new goodwill standards. The sample is taken from the financial information of publicly-traded companies tracked in the Compustat and CRSP databases. To identify firms that are likely to have managed earnings to exceed key benchmarks, earnings per share, both before and after goodwill impairment writedowns, is compared with two thresholds established in prior research. The first, is a positive earnings per share; and the second is the prior year’s earnings per share. Results from applying both tobit and logistic regression models suggest that managers are exploiting their discretion in recognizing goodwill impairments to manage earnings. Thus, this project contributes to the earnings management literature in that it highlights the exploitation of increased judgmental latitude for earnings management purposes.

I conduct an examination of the deferred revenue account. I provide descriptive evidence of deferred revenue both at an industry-level and a macro-level, and I examine whether managers use discretion in deferred revenue around earnings benchmarks. I develop a model to measure the normal change in short-term deferred revenue, and examine how the abnormal change varies across the pre-managed distribution of three common earnings benchmarks. My results show that managers delay recognition of revenue using deferred revenue when pre-managed earnings exceed benchmarks by a large margin, and accelerate the recognition of revenue using deferred revenue when premanaged earnings just miss or miss benchmarks by a large amount. I document the prevalence of accelerated revenue recognition, and show that meeting or just beating the annual consensus analyst forecast is where the most cases of suspected accelerated revenue recognition occur. The results are next strongest for the avoidance of earnings decrease benchmark and weakest for the avoidance of loss benchmark. I examine whether conventional abnormal accrual models reflect discretion in deferred revenue, and whether discretion in deferred revenue is associated with lower earnings quality. I show that deferred revenue changes are a leading indicator of future earnings. My results indicate that discretion in revenue can lower the predictability of sales regardless of whether it is of an aggressive or conservative nature.

Audit reporting lag continues to remain an issue of significant interest to regulators, financial statement users, public companies, and auditors. The SEC has recently acted to reduce the deadline for filing annual and quarterly financial statements. Such focus on audit reporting lag arises because, as noted by the Financial Accounting Standards Board, relevance and reliability are the two primary qualities of accounting information; and, to be relevant, information has to be timely. In my dissertation, I examine three issues related to the audit report lag. The first essay focuses on the association between audit report lag and the meeting or beating of earnings benchmarks. I do not find any association between audit report lag and just meeting or beating earnings benchmarks. However, I find that longer audit report lag is negatively associated with the probability of using discretionary accruals to meet or beat earnings benchmarks. We can infer from these results that audit effort, for which audit report lag is a proxy, reduces earnings management. The second part of my dissertation examines the association between types of auditor changes and audit report lag. I find that the resignation of an auditor is associated longer audit report lag compared to the dismissal of an auditor. I also find a significant positive association between the disclosure of a reportable event and audit report lag. The third part of my dissertation investigates the association between senior executive changes and audit report lag. I find that audit report lag is longer when client firms have a new CEO or CFO. Further, I find that audit report lag is longer when the new executive is someone from outside the firm. These results provide empirical evidence about the importance of senior management in the financial reporting process.

We propose and empirically test a new hypothesis that managers rationally choose between specific channels of earnings management to meet earnings benchmarks. Prior research documents that managers are ready to interfere with the neutrality of financial reporting process to report earnings above zero, earnings above last year's earnings, and earnings above analysts' forecast. However, there is a controversy over whether this earnings management to meet or beat earnings benchmarks is intended to distort investors' view by delaying the disclosure of bad news or whether it is intended to communicate managers' private information about the firm's strong future performance. We argue that the credibility of the earnings management signal crucially depends on the cost of its imitation. As revenue management is more costly to imitate than cost management, we argue that managers who intend to send a credible signal about their firm's future performance likely boost revenues rather than depress costs. To test this prediction, we use a recently developed model of discretionary revenues that is arguably more powerful in detecting earnings management than traditional techniques. The empirical results are consistent with our predictions for the most important earnings benchmark - the consensus of analysts'...

An increase in the prevalence of earnings restatements and cases of financial statement fraud in the early 21st century led to a significant loss of market capitalization and investor confidence in the attestation process. In an effort to restore such confidence, Congress passed the Sarbanes-Oxley Act (SOX) in July of 2002. The Act significantly increased the penalties for engaging in accrual activities aimed at either misleading users of the financial statements concerning the underlying economic condition of the firm or influencing contractual outcomes. Recent literature separates earnings management into accrual and real activities. Accrual activities include the management of accounts that have not yet been realized in cash, such as receivables and payables. Real activities include the management of actions that deviate from normal business practices, such as price discounts aimed at temporarily increasing sales, excessive inventory production aimed at lowering the cost of goods sold, and aggressively reducing discretionary expenditures such as R&D to improve profit margins. As a result of the increased penalties for engaging in accrual activities, one would expect a relative shift from accrual activities to real activities to facilitate earnings management in the post-SOX period. As with most academic social disciplines, the test employed in my dissertation is a joint test of the sensitivity of the tools available to detect management activities, the research design, and the presence and strength of the effect for which I am searching. This dissertation is the first to test for changes in both accrual quality and real activity-based earnings management in the post-SOX period. In order to test for a change in accrual quality in the post-SOX period, I utilize a model developed by Dechow and Dichev in 2002. The Dechow and Dichev (2002) model of accrual quality is an appropriate measure of accrual information risk, and may therefore be superior to the use of discretionary accrual models to test for an economic effect (Francis et al. 2004). I also utilize three empirical measures of real activity-based earnings management developed by Roychowdhury (2006) to document a change in real earnings management in the post-SOX period. The findings of the study empirically support a change in earnings management techniques in the post-SOX period compared to the pre-SOX period. Specifically, the quality of accruals incorporated into the accounting earnings figure have significantly increased in the post-SOX period. However, instances of earnings management using real activities have also significantly increased in the post-Sox period. These findings inform academics about the power of the tools used in academic accounting research and the overall quality of the argument. They inform users of financial statements about where to direct their attention in reading and evaluating the financials. Finally, they inform regulators, practitioners and policy makers of the effectiveness of the law at improving the quality of accruals, and bring to their attention a potential substitution in the techniques used to manage earnings.

Background & Subject discussion: Financial reporting and earnings affect stakeholders’ decisions and is a vital component in firm’s information disclosure. Management possesses considerable influence over financial reports. Earnings consist of a cash-flow and accrual component. Earnings can be affected by managers’ judgment and decision either by accrual-based earnings management or real activities manipulation. Earnings management affects the relevance and reliability of financial reporting and is widely researched. Europe is consolidating and accounting and audit standards are harmonizing. Real activities manipulation is unobserved in Europe. Increased attention and regulations of earnings management are inducing more creative methods to alter earnings, such as stock repurchases. Purpose: The main purpose of this study is to investigate if real activities manipulation can be observed in Europe and to what extent in relationship to accrual-based activities to avoid reporting small losses. An underlying purpose is to study different methods of RAM, including some newer approaches to detect hypothesized RAM by stock repurchases. An additional purpose is to evaluate the different utilized detection methods to clarify effectiveness. The final purpose is to consider possible effects of EM on reliability and relevance of financial reporting. Conclusion: The result concludes that earnings management are performed by real activities manipulation. Stock repurchases, decreased discretionary expenses and production cost all indicate earnings management to avoid reporting earnings below a specific benchmark. The result questions the reliability and relevance of reported earnings.

<p>Earnings management could be motivated by either managerial opportunism or efficient contracting. To discriminate between these motivations, I use a measure of product market competition that analytical research predicts will discipline managers and better align their interests with those of shareholders. Thus, if earnings management reflects managerial opportunism, then an increase in competition will decrease earnings management; and if it reflects efficient contracting, then an increase in competition will increase earnings management. Consistent with earnings management indicating managerial opportunism, I show that an increase in competition decreases real earnings management in the form of overproduction to avoid reporting negative earnings or a negative change in earnings.</p> / Dissertation

This thesis presents two essays on real earnings management and future performance. The first essay draws on empirical studies that examine the three types of real earnings management activities in the United Kingdom (UK) for firms that are more likely to manipulate their earnings to avoid missing earnings targets. These targets include the zero earnings, and last year’s earnings. Also drawing from empirical studies, the second essay investigates the impact of real earnings management on firms’ future operating performance in the UK. In the first essay, I examine earnings management through real activities manipulation by using a sample of UK firms over the period 2009-2013. According to the transaction cost theory and opportunistic perspective of earnings management, the results of the first essay reveal that managers in UK suspect firm-years that manage earnings upward utilise more real earnings management activities to achieve earnings benchmarks opportunistically. Specifically, I find that (1) firms which manage upward earnings have unusually low cash flows from operations by offering price discounts or/and more lenient credit terms to increase sales; (2) firms that manage upward earnings have unusually low discretionary expenditures by cutting/reducing expenditures spending to improve reported margin and (3) firms which manage upward earnings, incur unusually high production costs by producing more products to report lower costs of goods sold in order to achieve their targets. Further, I find evidence that UK firms’ meeting/beating earnings benchmarks around zero earnings and last year’s earnings engage in sales-based manipulation and reducing/cutting discretionary expenses simultaneously; they also engage in overproducing products and reducing discretionary expenses at the same time. Furthermore, I do not find, however, evidence that managers in UK firms are associated with high real earnings management through sales-based manipulation to meet/beat last year’s earnings. On the other hand, I find evidence that manager in UK firms engage in income-increasing earnings management through accounting choice (e.g., accrual-based earnings management) to meet an earnings target. Motivated by agency conflicts of real earnings management (e.g., opportunistic and signalling perspectives), the second essay investigates whether there is an association between UK firms that manipulate their business operations to meet earnings benchmarks (e.g., zero earnings, last year’s earnings) and subsequent operating performance. I implement Fama and MacBeth’s (1973) regression analysis to examine the effects of the magnitude of real earnings management on firms’ future performance. Empirical test results show that manipulation of operating activities such as sales, discretionary expenditures, and production costs to meet earnings benchmarks has a significant positive consequence for firms’ subsequent operating performance and signals firms’ good future performance. Further, I find evidence that firms that manipulate their operating activities in the absence of meeting/beating earnings benchmarks experience a decline in their subsequent operating performance. The findings of this research lend support to our understanding of the process that management follows to evaluate costs and benefits of real earnings management.

<p>I start with a sample of 26,998 CEOs from the Compustat Executive Compensation (ExecuComp) database starting January 1, 1991 and ending January 1, 2009. I then match the sample with the FAA’s Airmen Certification database using the CEO’s first name, middle initial, and last name. Names with a match are coded as pilots and names without a match are coded as non-pilots. Following Roychowdhury (2006) I remove all firms in regulated industries (SIC codes between 4400 and 5000) as well as banks and financial institutions (SIC codes between 6000 and 6500). The resulting sample consists of 255 pilot-CEOs and 3,935 non-pilot-CEOs. I then merge the CEO dataset to the Compustat Fundamentals Annual database to obtain a final sample consisting of 1,038 CEO-pilot firm-years and 18,455 CEO-non-pilot firm-years. All variables are winsorized at the 1% and 99% levels.</p><p><a></a> </p><div><br><div><p><br></p></div></div>